The expanding horizons of Regional Trade Agreements

With the WTO in crisis, and hopes fading for the multilateral route to international trade, there is an inevitable shift to regional agreements.

Moana Bhagabati

The suspension of multilateral trade negotiations in July under the Doha Development Agenda has opened up the world economy to a more extensive and intensive process of regionalisation. With the World Trade Organisation (WTO) beset with a series of crises, a large majority of members are not too hopeful of the multilateral route to international trade. Inevitably, their focus is likely to shift to bilateral and regional agreements. Thus there appears to be no stemming the process of formation of Regional Trade Arrangements (RTAs), which gained momentum in the last decade and a half.

Starting from the late-1980s and the early-1990s, RTAs have proliferated spanning countries, regions, and continents. New agreements covering large areas geographically contiguous and otherwise have been created, pre-established regional integration groups revitalised, and the scope of many existing agreements expanded.

The buzzword

RTA is thus the current buzzword in international trade parlance. In fact, of the 149 members of the WTO, all but Mongolia are signatories to one or more RTAs, with some signing up 20-plus. In the over four decade of the General Agreement on Tariffs and Trade (GATT) only 124 RTAs were notified, but in the last decade since the inception of the WTO over 200 have been notified, and there is little by way of accounting the non-notified regional agreements.

Currently, 197 RTAs notified with the WTO are in force; the number exceeds 300 if those being negotiated, those in the proposal stage, and ones that are signed but not yet in force are counted. An estimated 60 per cent of world trade is now covered by regional pacts. Both the Americas; all of Europe, including the transition economies of eastern part; most of Africa, Asia, Australia and New Zealand, are signatories to Free Trade Area (FTAs), Customs Union (CUs) and partial scope agreements.

An earlier wave of regional integration in the 1950s and the 1960s, confined primarily to Europe and Latin America with a sprinkling of initiatives in Africa, did not survive beyond the European Union. A renewed interest in regionalism in the late-1980s had roots in a series of contemporary political-economic events. Fears in much of the world of a `Fortress Europe' egged the US to forge regional ties, first with Israel in 1985, then with Canada in 1988 which embraced Mexico to form the NAFTA in 1994. This marked a watershed in the revival and current spread of regionalism.

Widening scope

Interestingly, the spread of regionalism is not limited to a rise in numbers alone. Increasingly the scope of the bilateral, regional and plurilateral agreements has enlarged. Many of the arrangements now include subjects under the `Singapore Issues' (trade facilitation, investment, government procurement and competition), and others (example, the NAFTA) have a separate dispute settlement mechanism.

This unprecedented trend once again raises vital questions about the future of the global trading system. Has regionalism emerged a force parallel to multilateralism, and is that necessarily detrimental to interests of trading countries, particularly those from the developing world? Do RTAs stimulate growth, investment and economic development, facilitate technology transfer and induce political stability and cooperation? Or do they divert trade in inefficient directions?

The answer, at least at present, probably can offer nothing more concrete than saying that the outcome of the process would depend on the particular conditions and agreements governing each RTA.

RTAs in multilateral system

A trading arrangement among a subset of countries in which members trade on preferential terms with discriminatory removal trade barriers among themselves broadly describes an RTA.

Within the WTO, regionalism is viewed as `actions by governments to liberalise or facilitate trade on a regional basis, sometimes through free-trade areas or customs unions'.

The Most Favoured Nation (MFN) clause under Article I of the GATT enshrines the fundamental principle of non-discrimination.

This implies that in the trade of goods (and services under General Agreement on Trade in Services; GATS), all imported products should receive the same tariff or non-tariff treatment irrespective of their country of origin.

RTAs, which essentially represent a departure from this principle, are accommodated within the multilateral framework primarily through certain exceptions.

Article XXIV of GATT permits signatories to set up regional FTAs and CUs for trade in goods, Article V of the GATS for services, and the Enabling Clause provide legal cover for preferential trade agreements among developing countries.

The WTO, thus, has a clear brief to monitor the spread of RTAs and review their consistency with prescribed regulations. The Committee on RTAs (CRTA) has the primary responsibility to conduct the review of RTAs, aided by other WTO bodies.

The underlying motive of the review process is to examine whether a given agreement is consonance with the criteria prescribed. Effectively, trade barriers must not be raised against non-members; they must be eliminated on "substantially all trade" among members; and formalities leading to RTAs must be completed within 10 years.

Transparency mechanism

In this context, the July announcement of a new WTO transparency mechanism for all RTAs approved by the WTO's Negotiating Committee on Rules is a most welcome development.

The mechanism, aimed at facilitating the process of notification of RTAs, also has the mandate to expedite reviews of RTAs and examine their consistency with WTO prescriptions.

Meanwhile, the pros and cons of regionalism versus multilateralism continue to be seriously debated by academics, policymakers, business federations, civil society and other parties concerned across the world.

The `multilateralists' note that RTAs often divert trade by creating preferential treatment for inefficient members

vis-à-vis

non-members, leading to lopsided development; and countries not in any RTA would get marginalised. `Regionalists', on the other hand, claim that trade creation is generally seen to exceed trade diversion, and, in that sense, RTAs promote trade and development.

Regional liberalisation creates incentives for individual countries to follow suit, and this could add up to the multilateral process of trade negotiations. Also, the positive effect that regionalism has, or is likely to have, on the politics of regional partners could ease inter-nation rivalries.

Many of the existing RTAs are plagued with a number of problems lack of transparency, discriminatory preferential deals, complex and restrictive Rules of Origin, imposition of non-trade barriers, even non-implementation of clauses in the agreements.

While there is no going back on the process of regionalisation, safeguards have to be taken to ensure that RTAs adhere to the spirit and purpose of trade creation, not diversion.

In a world teeming with agreements with ever widening coverage there is very little clarity yet in the direction in which this runaway phenomenon is likely to head.

(The author is Assistant Professor, Madras Institute of Development Studies. Email: moana@mids.ac.in)

(This article was published in the Business Line print edition dated August 9, 2006)

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